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Borrowing money from the bank for your mortgage deposit

The pros and cons of borrowing money for a deposit

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 23rd August 2019 *

Can I use a loan for a mortgage deposit

Getting a deposit together for a mortgage can be a long and difficult process. Lots of people approach us wanting to know if they can take out a mortgage deposit loan, and what their options are. The good news is that yes, it is possible to get a mortgage with borrowed deposit, but how you acquire that cash can have a big impact on how favourably you’re looked at by lenders. This article covers the following…

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Why Get a mortgage with loaned deposit?

These days you are looked at far more favourably by lenders if you manage to put down a mortgage deposit of 20% or more. In doing so, you will have a far wider option of lenders to choose from, and therefore access to more competitive rates, which could potentially save you a lot of money in the long run.

However, scraping enough savings for a 20% mortgage deposit is no mean feat and could take a very long time.

Saving while renting can be an uphill battle against expensive everyday running costs, and most people are keen to get onto the ladder as soon as possible.

Rather than prolonging the wait, some people may consider borrowing money from various sources to boost their mortgage deposit savings into that higher bracket.

While this sounds like a good idea in theory, loans in any form are typically frowned upon by lenders, and using one towards your deposit may actually hinder your application rather than helping it.

However, this will also very much depend on your situation and individual circumstances, so read on to find out what loan options for mortgage deposits are right for you.

Getting a personal loan for a mortgage deposit

We have quite a few customers asking us “Can you take out a bank loan for a mortgage deposit?” - The short answer is … It’s possible.

Lenders can be wary of mortgage deposits sourced from loan, and as such, there aren’t many who deem them an acceptable source of finance. What’s more, borrowing money for a deposit on top of taking out a mortgage brings additional stress and financial risk to an already trying situation. But if it’s your only option, there are a couple of things to bear in mind.

When you apply for a mortgage, lenders assess your eligibility by looking at your debt-to-income ratio. They will consider your earnings alongside what credit you owe and how many instances there are, and assess your financial capability by working the mortgage into the equation. If there is evidence to suggest you will be able to afford the mortgage repayments alongside the loan (plus any other outgoings), then you may be considered by a handful of lenders.

What else affects eligibility if I’m using a loan for a mortgage deposit?

There are a number of other factors at play that may either increase or inhibit the likelihood of your application being accepted. For example, if you have a history of adverse credit, depending on the severity and recency of the instance, the less likely you are to be accepted.

The other types of loan you have are also a factor - for example, having a car on finance may not be a problem if you’ve kept up on the repayments, but something like a payday loan, even if it’s been paid off, on your record will ring alarm bells, and your application is likely to be declined if you’re proposing to get a loan to fund the whole or even just part of your deposit.

If you are accepted for a mortgage using a bank loan as a deposit, it’s also worth knowing that many lenders will see the investment as high risk, and as well as being offered less favourable rates they may also considerably lower the amount they are prepared to lend you, which may defeat the purpose - so make sure you understand the terms before you commit.

Be sure to make an enquiry to speak with a mortgage deposit expert if you’re unsure about any aspect of your application.

Using a credit card or overdraft as a deposit

“Can I use a credit card for a mortgage deposit?”

In some cases it is possible to use your credit card or an overdraft for a mortgage deposit, but this is considered another risky business.

Although the prospect of buying a house without saving for a deposit may appear tempting as a means to get onto the ladder quickly, it’s not that simple.

Most lenders will require that a minimum of 5% of your deposit is made up by personal savings, so if you were considering using a credit card or overdraft for the full deposit amount you are very unlikely to be accepted.

Once again, lenders will carry out the relevant checks and will require a declaration of how your deposit has been financed, so they will be able to tell where the money has come from.

As with loans, lenders will also assess your financial capability by looking at your debt-to-income ratio and any other outgoings alongside the credit card repayments and mortgage. Again, you will be limited in the number of lenders willing to offer you money, they may limit the amount you can borrow, and you will not be offered the best interest rates for a mortgage - not to mention the interest you’ll be racking up on your credit card or in overdraft fees.

That said, there may be specialist lenders out there who are willing to offer you a lifeline, so get in touch and the advisors we work with will help you find them.

Using a family loan for a deposit

Many first time buyers rely on the bank of mum and dad for help getting onto the property ladder.

There are several ways a parent or family member can help a first time buyer get a mortgage, either through an interest-free loan, an investment, or as a gift (find out more on gifted deposits here, but the latter two have tax implications.

A family loan is treated similarly to a conventional loan in that lenders must be happy that the repayments are affordable alongside the mortgage and other outgoings, and any other influencing factors such as credit history.

Although still regarded with some caution by many lenders, family loans are typically looked at slightly more favourably due to the typically lower interest rates (positively affecting affordability) and the level of trust instilled by family backing.

However, the individual will stand a better chance of acceptance (and better rates) if they contribute some of their own savings alongside the loan.

Lenders usually require a formal document of terms signed by all parties for any family loan. The document will need to state the terms of the arrangement, including but not limited to what will happen to the money if one of the party dies and what happens if the lender needs the money back, etc.

This is definitely recommended, because family arrangements can be tricky and having a contract in place will help prevent conflict if circumstances change later down the line.

Taking out a directors loan for a deposit

If you’re a business owner you may consider taking out a director’s loan for a house deposit, which is where you finance your mortgage deposit using money from your own company. While this is certainly an option with many lenders, each will have their own criteria you need to meet. For example, some may only consider a director loan as a source of finance if it is repayment from funds that you yourself put into financing the business initially, and most lenders will want evidence that withdrawing this loan will not be detrimental to the business’s ongoing functions.

There are also three types of tax which can have considerable implications:

  • Corporation Tax
    Any loans to directors outstanding at your company’s year end are required to be disclosed in the accounts and on the company tax return.
    If they are not repaid within 9 months of the accounting period end, then the company will pay extra Corporation Tax, which will then be repayable to the company by HMRC when the loan is repaid to the company.
    If you intend to take out a loan from your business then consider when you do it, so you can benefit from the maximum time allowed before repayment is due.
  • Income Tax
    Dividend income falling within the higher rate tax band (over £46,351 - £150,000) are taxed at 40% (although this can be mitigated if you make personal pension contribution, for example).
    Again, careful planning of the exact date the dividend is payable can help you spread dividends across tax years.
  • Taxable Benefits in Kind (BIK)
    Any low interest / interest-free loans over £10,000 will result in a taxable Benefits in Kind (BIK), whereby you’ll be required to pay tax on the deemed value of any interest you’ve saved. However, there is no BIK if you pay interest to the company at 2.5% or above.

While a director’s loan can be costly if you don’t plan your cash advances properly, if you’re clever about it there can also be some tax advantages.

The tax liability on loans is payable by the company, whereas tax on dividends is a personal liability met from the dividend.

Funding a deposit with your pension

Some business owners look towards their pension if their firm needs a quick cash injection. Pension-led funding is an option available to those who have a self-invested personal pension (SIPP), and can only be used for commercial purposes, not residential.

One of the most popular ways to take advantage of the scheme is to purchase commercial property for the business using your pension cash.

While lenders are typically happy to let you use funds from a pension for a mortgage deposit (provided you have no other factors against you to affect your financial capability), it’s not a decision to make lightly.

You must have a concrete plans as to how you are going to save to replace this money further down the line, and be confident in your business’s performance, as the biggest risk surrounds your future livelihood if the business fails.

There are also tax implications, as you will be required to pay tax on three quarters of the amount of the sum at your marginal income tax rate. In addition, the tax deducted by the pension provider may be greater than the amount due and you may have to wait some time before you receive the refund.

Using existing equity as a deposit

Releasing equity, or using your current property as deposit for a mortgage, is a common way of generating a deposit if you’re looking to invest in a second home or buy to let (BTL). The options available to you will depend on your situation, and the first thing to consider is how much equity you have in your current property.

Equity is the difference between what you owe on your mortgage and the property’s market value. If for example, your current home is worth £250,000 and you have a mortgage of £100,000, you have £150,000 in home equity.

You can therefore unlock some of this equity in what’s called a cash-out refinance, where you take out a new, bigger loan that pays off your existing mortgage and the remainder can be used for a second home, for example.

Provided you own enough of your current home, mortgage deposits from equity can be an effective way to invest in a second property, as opposed to borrowing from other sources or taking out a separate mortgage on a second home.

What’s more, lenders tend to offer more favourable rates to those who invest using their own home’s equity because they have more invested in the game and a lot more to lose.

However, in tapping into your home’s equity you are increasing your monthly mortgage payments, as well as increasing the risk of losing your primary home to foreclosure. You’re also investing a lot of money into one type of asset, and no one can be certain what will happen on the property market in the future.

Of course, just because you own a chunk of your own home does not necessarily mean you’ll be accepted for a larger mortgage to also fund a second. The more equity you have in your primary home the better, but individual circumstances such as age and credit history are a factor as well.

Lenders will also assess your affordability to ensure you will be able to keep up with the larger mortgage repayments.

The second property type is also a consideration; while the maximum loan to value (LTV) on a standard residential mortgage is 95%, the maximum for a BTL is 85%, and holiday lets 75%, so bear in mind you’ll need far more initial investment if the second property isn’t for your personal use.

If you’re still unsure whether using equity from another property you own is a viable option for amassing a mortgage deposit, get in touch and the advisors we work with will offer expert insight and pair you with the right broker, should you choose to push ahead.

Is bridging finance a viable way of raising a deposit?

Bridging finance is a form of short term lending that landlords, developers and even house hunters have been known to turn to.

They are perfect if you’re looking to buy a property at auction or, at a pinch, they could be used to raise a deposit.

The downside is that they usually come with higher interest rates than other forms of lending such as mortgages, but are often more flexible and far quicker to arrange.

For the right advice on whether a bridging loan would suit your circumstances, talk to one of the expert brokers we work with.

Need More Assistance? Speak to a borrowed mortgage deposits expert

If you have any questions or you’d like further advice on borrowing money or using a loan for a mortgage deposit, call Online Mortgage Advisor on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee, and there’s no obligation or marks on your credit rating.

Updated: 23rd August 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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